Watching the economic cycle go by

"I want you, every morning, to wake up, look in the mirror and ask yourself: 'What can I do today to increase the money supply?' "

Thus did John Ehrlichman, Richard Nixon's chief domestic policy adviser, apocryphally speak to Charles Pardee, Federal Reserve governor, at the start of the 1970s. Thus do White House officials perennially regard the levers of economic policy.

They know full well that a healthy economy - low unemployment, rapid output and productivity growth, low inflation - may not guarantee the re-election of their presidential principal but that an economy perceived to be unhealthy is a prime trigger of electoral defeat, which will give them all the opportunity to spend more time with their families.

However, the Bush administration has been different. Since George W. Bush's inauguration, pressure on the Fed to cut interest rates faster than, or below, the levels with which the central bank would have been comfortable has been very light. Spending policy has virtually been on autopilot - with the exception of the limited post- September 11 2001 military build-up. And tax policy has been focused on cutting the taxes that the relatively well-off will pay late in this decade and into following decades, not on rapidly getting money into the hands of those who will quickly spend it and so boost demand and employment.

If there is a single phrase that comes to mind when looking at the Bush administration's pattern of business cycle management, it is "blithe unconcern".

Of course, press secretaries - even, in occasional speeches, the president - will say different. They will talk about how all administration economic policy is aimed at providing more jobs for Americans. They will talk about the president's jobs-and-growth strategy. But the disconnection between the kinds of tax and spending policies that would boost growth and employment in the short run (say, before the president runs for re-election in November 2004) and the policies pursued by the administration yawns much wider than is typically the case, even in Washington.

This is one of the great mysteries of the Bush administration. In any other administration, the assistant to the president for economic policy and the assistant to the president for political affairs would have been in the Oval Office a week or so after September 11 2001. They would have pointed out that the terrorist attack on the World Trade Center and the callous murder of 3,000 people would have effects on the economy that were much less important than the national security implications but that were still worth a little attention.

They would have laid out three scenarios for future developments: a rapid bounce-back of private investment, as businesses shook off fear and uncertainty; a prolonged pause in investment that could be remedied by Fed interest rate cuts to make borrowing cheaper and building new factories and installing new machines more attractive; and a long-lasting wave of uncertainty that would lead businesses to reduce investment for years, even if the Fed pushed interest rates as far down as it could.

In the first and second scenarios, they would have said, large budget deficits in 2002, 2003 and 2004 would not be necessary to keep the economy near full employment. But in the third scenario, only large budget deficits and lots of fiscal stimulus could keep the economy near full employment. Since we do not know which scenario will come to pass, they would have said, we should at least be prepared to propose substantial increases in public investment and cuts in taxes on those with high propensities to spend; it would be a way of taking out insurance against the possibility that this third, unfavourable economic scenario might come to pass.

However, it appears that this conversation never took place. And so the fiscal insurance policy against the situation in which the US economy now finds itself - an extremely slow recovery accompanied by rising unemployment and sluggish investment, coupled with a Federal Reserve that has little power to provide additional boosts to aggregate demand - was never issued.

Opportunities to reassure investors by moving aggressively to deal with the corporate accounting scandals that Alan Greenspan, Fed chairman, (and others) think have discouraged investment have been fumbled. Rather than advancing the ball on free trade, the administration has shown itself eager to violate its World Trade Organisation obligations by slapping on tariffs that it thinks are politically advantageous. The tax cuts pushed by the administration are not tax cuts designed to boost demand in the short term of a year or two as much as tax cuts designed to reduce the share of the tax burden paid by the relatively wealthy over a decade or more.

Wherever the administration has had a chance to take steps to improve the short-term business cycle outlook, it has seemed eager to do something else. Among many in Washington today it is conventional to deride the Bush administration as one in which cynical, short-term political calculation is all. Policies are supposedly made by political tacticians, not by cabinet secretaries. But that does not explain what is going on. The most short-term and cynical of political operatives is at least as depressed as any economist at the thought of starting a presidential re-election year with US employment 2m workers below its previous peak.

Instead, the strange inaction of the Bush administration seems to be driven by something else. To this outsider, at least, it looks as though those working in the White House share a common background assumption: they fear the domestic side of the government and desperately wish for the domestic side of the government to do as little as possible. Tax cuts, yes (especially because they believe tax cuts will ultimately cause the shrinkage of the government). Tactical moves for political advantage, yes. But the idea that the domestic-side government can be a force for human betterment - by boosting aggregate demand in recession, opening up markets through free trade agreements, or whatever - appears to be a strange and unfamiliar one and thus suggestions that the domestic government do something, anything, face a hard uphill climb.

The writer is professor of economics at the University of California at Berkeley

Give it up Brad. Trying to decypher the actions of the Bush Administration through rational means can be an exercise in futility. Their fiscal policies are based largely on ideology, not reason. Like Saddam or the Taliban, sometimes parties do things without much thought towards the likely consequences, they just know they are right and act.

Bush I proves that it's important to look like you care. But there's little the administration can do in the short term that isn't just as likely to be harmful in the long term.

Maybe interest rates are still too high, but it isn't immediately obvious. Seems disingenous to fault the Bush administration for failing to pressure the Fed into even lower rates. If anything, one of the great criticisms of governments is that they goose the money supply to reelect leaders to their long run detriment.

After criticizing Bush for failing to do things that would be harmful or wouldn't matter, you seem to criticize him for failing to increase public investment and running deficits. Seems I've read plenty of recent criticisms by you about deficits. But even if we assume 'good deficits' (for things you like) and 'bad deficits' (for things you don't), you can't possibly believe that increased public spending would make much difference in the short run?

What would an extra $200 billion, say, in deficit spending this year do for the overall health of the economy?

Gary it is not the amount of deficit spending, it is how the money is spent. If most of the deficit spending goes to wealthy individuals that use the money to buy government bonds issued to cover the debt, there is little stimulus. If the money instead goes to the states so they don't have to cut back on projects, prevent lay-offs or to lower class individuals that will spend the money and stimulate demand, then that will help the economy move.

Do you think a government is helpless to do anything about the economy? That seems to be the belief of Mr. Bush and it is pathetic that he occupies office at a time when interventionist fiscal policy is needed. Mr. Bush is a loser and yes, we should hold him responsible for faliure to respond to economic problems. This is not one of his half brain companies that can be floated by donations from Daddy's friends until it finally goes belly up. This is can do America. There is no place for losers at the top. Ignorance is not an option. If Mr. Bush doesn't know what to do or believes that the government can do nothing, then we need to replace him with someone who understands economics and fiscal policy.

Mr. Bush came into office with a promise to 1) cut taxes, 2) leave no child untested and 3) bring dignity and respect back to the WH. That was it. He had no agenda for government programs to make life better. In his mind, those are all failures and should be replaced by church work. He had no ideas about protecting the environment, only ways of letting his friends exploit our common resources. He really did lack "the vision thing." In my mind his failure to grasp the power of the government to help people and do good is reason enough for him to quit after this term.

"But the idea that the domestic-side government can be a force for human betterment - by [...] opening up markets through free trade agreements, or whatever - appears to be a strange and unfamiliar one"

I find it hard to see how bringing down trade barriers can be considered government "activism." In fact, I find it hard to believe that the administration's policies are governed by any rational principles whatsoever.

What seems to me to be the likeliest explanation for the administration's policies is that it views the interests of corporations, rather than that of Americans as a whole, as being paramount. Such a stance would explain the eagerness to slap on tariffs under the slightest pretext - from the viewpoint of the CEOs in many of these uncompetitive industries, tariffs on lower priced imports must seem like a fabulous idea.

bakho asks "Do you think a government is helpless to do anything about the economy?"

That's precisely right, at least in any meaningful and long-lasting way.

The government can probably juice the economy enough to re-elect a President in the short term. A federal reserve can probably do this. But should they? And aren't the risks pretty substantial that this will have long-term negative consequences that make people in general worse off?

If we're intellectually honest we'll say that we like to score cheap political points by blaming an administration -- Republican or Democrat -- for missteps in the economy.

I'm NOT saying that government does not affect the economy. If government suddenly was cut by 50%, there's be major dislocation and that would have economic implications (certainly negative in the short temr). If government doubled spending (and future payment obligations) that would also affect the economy.

And historically government policies HAVE had an impact. Fed contraction combined with increased tariffs no doubt contributed to the Great Depression.

But even a 10% increase in federal spending, amounting to 2% of GDP or thereabouts, will be like dumping a glass of orange juice in the ocean. The Atlantic doesn't turn orange.

The view that the government is "doing something", while true, ignores the argument that it is not doing what is optimal to goose up growth in the near term. Why would you cut taxes in a couple of years when a tax cut now would do more to solve and economic, and political, problem? It may be because the debate started with insistence that the prior tax cut was too big, which led to an artificial set of deficit constraints getting built into the debate of the next round of tax cuts. It looks like an inside-the-beltway problem. The question is still why a debate over deficits was conducted by inside-the-beltway rules, when the public didn't want higher deficits and didn't care about the rules. Could Greenspan's message, that short-term deviations in economic performance are the Fed's job, have been taken as gospel? That opens up the possibility of claiming to do one thing (cure a sick economy) while really doing another (boost the wealth of the wealthy) without expecting to pay a political cost. As long as the Fed gets the job done, Bush and Congressional Republicans get a free pass.

Gary, 2% equals a mighty big glass. A 2% rise in sealevel would be noticeable. Of course, your argument would make more sense if Bush didn't buy the orange juice. To complete your analogy with the charges outstanding, Bush didn't bother to toss the OJ in the ocean he instead gave it to his friends on the beach. To make matter worse, it appears he used our retirement funds to buy it.

bakho says:
In my mind his failure to grasp the power of the government to help people and do good is reason enough for him to quit after this term.

Restated, this means: "In my mind his failure to accept the wonderfulness of the liberal agenda is reason enough for him to quit after this term."

Believe it or not, there are many people out here in the hinterlands who view government's "power to help people and do good" suspiciously. This is why the phrase "I'm from the government and I'm here to help you" is the punchline of old jokes. Not because it never happens, but rather because when it happens, now your troubles are just beginning.

Brad, what you are saying can be translated to:

"Bush II is failing to manipulate Keynesian fiscal and monetary policy in the way I think would best ensure his reelection. What is he, a moron?" Maybe he realizes that, in the long run, such actions are harmful, and that he might as well use tax cuts to (pick 1) pay off cronies/stimulate long run growth by giving money to higher income individuals, thus stimulating savings/starve government of funds, preventing the imposition of further "big government programs" at either the federal or state levels.

Arnold Kling is "right wing" but never actually right. The Administration is presiding over the slicing of social service and non defense protection programs as well as running up a debt that will undermine Social Security and Medicare.

This is not a conservative Administration, but a radical-right Administration. Klingy loves 'em.

If the government hired the unemployed to retrofit government and commercial buildings to be energy efficient, that would bring short-term stimulus to boost growth now, the purchasing would stimulate new industries, and long-term the economy (and foreign policy) would gain from increased energy efficiency.

Personally, I'd prefer to pay for it with a tax on wealth, redistributing wealth to consumers, further stimulating our consumer economy.

I think this is the worst government the US has ever had in its more than 200 years of history. It has engaged in extraordinarily irresponsible policies not only in foreign and economic but also in social and environmental policy.